Alibaba Group Holding Ltd (NYSE:BABA) stock came under pressure yesterday. However, the selloff in Alibaba stock is overdone.
The more than 100% rally in shares of Chinese eCommerce giant Alibaba Group Holding Ltd (NYSE:BABA) this year came to a screeching halt yesterday with Alibaba stock falling almost 5%. The fall in BABA stock could be linked to several factors, including the broader correction in growth stocks, profit booking and the decision by Alibaba to consolidate the financials of its delivery arm Cainiao Smart Logistics Network Ltd. Alibaba stock had recently hit its new all-time high of $180.87. We feel that the selloff in Alibaba stock is overdone. BABA stock is a good long-term buy.
Growth stocks under pressure as value stocks gain favor.
Yesterday the market saw a broader correction in high-flying growth stocks with shares of Facebook (NASDAQ:FB), AMD (NASDAQ:AMD), Alibaba Netflix (NASDAQ:NFLX) and NVIDIA (NASDAQ:NVDA) crashing over 4% during yesterday's trade. The tech-heavy Nasdaq 100 index fell by 1.1%, in comparison, the S&P 500 was down marginally by 0.22%. According to analysts, the market is witnessing the recycling of money from growth stocks to value stocks which have done well over the past few trading sessions. This trend could keep the pressure on growth stocks in the coming trading sessions. The fractured mandate in the recently concluded German elections and the geopolitical concerns around North Korea also contributed to the selloff, as investors looked for lower risk assets.
Alibaba to acquire a majority stake in its delivery affiliate.
Another factor which could have led to the 5% fall is Alibaba's decision to increase its stake in Cainiao, its delivery affiliate, from 47% to 51%. It was the very same company which had brought Alibaba under the SEC scanner for its accounting practices. SEC had asked Alibaba why it was not consolidating financials of Cainiao on its books. Alibaba owned 47% stake in the company, hence it didn't have the majority of the votes. However, a majority vote is not the only consideration in deciding whether the company should consolidate the books of a subsidiary. Under Variable Interest Entity (VIE) model, a company needs to consolidate the financials of a VIE a) if it has the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance and (b) the obligation to absorb losses or the rights to receive benefits that could be significant to the VIE.
Consolidation will hit the bottom line and return metrics.
The reason why Alibaba was unwilling to consolidate the financials of Cainiao was that the consolidation is likely to impact its bottom line and return numbers. Alibaba says that it operates on an asset lite model, relying on other partners for delivery and logistics. This is the reason why Alibaba is able to post strong profit numbers while competitors like J.D.Com and Amazon.com who have their in-house delivery arms are seeing negligible profits.
Alibaba will acquire the majority stake in Cainiao for 5.2 billion yuan ($800 million). With this, the company will also be consolidating the results of the delivery business in its financials. While this will help it smoothen the regulatory wrinkle, the company will also see its profitability and return metrics drop. Cainiao is currently a loss-making but rapidly growing company. The company saw its net loss triple to 2.2 billion yuan in 2016 from a year ago period. However, revenue also tripled to 9.4 billion yuan.
Going by the above numbers, Alibaba will have to reduce its bottom line by $330 million and add $1.4 billion to its top line for 2016. The numbers will only grow in 2017. This will have an adverse impact on the margin figures and return on equity. The consolidation will also lead to erosion of transparency as Alibaba will no longer show separate figures for the delivery arm but will lump it under "core commerce" segment.
Investing for growth.
Apart from the $800 million the company will pay for the majority control of Cainiao, the company is also planning to invest around 100 billion yuan ($15 billion) over the next five years in the logistics business with the aim of strengthening its global logistics network that aims to realize its mission of fulfilling orders in China within 24 hours and within 72 hours anywhere in the world. This is not the only big investment Alibaba has made in recent months. A few months ago, the Chinese eCommerce giant topped its investment in the Lazda group by another $1 billion. Alibaba had invested $1 billion in Lazda group last year. Alibaba also made a $100 million investment in Bigbasket, the biggest online grocery player in India and several hundred million dollars in Paytm mall which emerged as India's third largest eCommerce platform during the recently concluded festive season sale.
Alibaba stock is still a good long-term buy.
All said and done, yesterday's sell-off in Alibaba stock was overdone and the stock could bounce back in the coming trading sessions. However, the stock is likely to meet resistance from the 20-day moving average line. The 20-day moving average line had been a strong support for Alibaba stock in the last six months. However, the stock fell below the support line during yesterday's trading session on heavy volumes. If Alibaba stock manages to breach the resistance from 20-day SMA then it is likely to head for its all-time high mark. Geopolitical concerns could still play a dampener. However, the stock remains a good buy for the long term.
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